The rehabilitation tax credit that provides an incentive for real estate owners to renovate and restore old or historic buildings has been modified under the Tax Cuts and Jobs Act (TCJA) signed into law in December 2017.
Under the new law, taxpayers claiming a 20 percent credit for the qualifying costs they incur to substantially rehabilitate a building must spread out that credit over a five-year period beginning in the year they placed the building into service, which is the date on which construction is completed and all or a portion of the building can be occupied. Excluded from the credit are any expenses that taxpayers incurred to buy the structure.
In addition, the law specifically eliminates the availability of a reduced 10 percent rehabilitation credit for pre-1936 buildings. However, owners of certified historic structures or pre-1936 buildings may qualify for temporary relief under a transition rule when they meet the following conditions:
- The taxpayer owned or leased the building on Jan. 1, 2018, and he or she continues to own or lease the building after that date.
- The 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.
Qualifying for and claiming the rehabilitation tax credit can be a complicated process for which taxpayers should seek the counsel of professional tax advisors and accountants.
About the Author: Joshua P. Heberling is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he focuses on tax planning and compliance services for high-net-worth individuals and businesses in the commercial real estate, land development and office market industries. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The open-enrollment period for U.S. taxpayers to secure medical health insurance for 2019 via the Health Insurance Marketplace runs from Nov. 1, 2018, through Dec. 15, 2019. While the new tax law introduced on Jan. 1, 2018, does eliminate the Obamacare individual shared responsibility penalty for individuals who go without insurance in 2019, there are other reasons taxpayers should consider enrolling in a marketplace plan for 2019.
Some states, such as the District of Columbia, Massachusetts and New Jersey, have implemented their own individual mandates that will assess penalties on residents who do not have minimum essential health care coverage in 2019 and who do not qualify for an exemption.
In addition, by enrolling in a marketplace health care plan, you will continue to receive many of the benefits and incentives that the Affordable Care Act (ACA) introduced, such as guaranteed coverage for pre-existing conditions and free annual physical exams and preventive care immunizations, screenings and counseling. Without a marketplace plan, you may be denied coverage from a private insurer, or you may be unable to afford care and treatment for an unexpected illness or injury to you or your family members.
Due in part to the elimination of the individual mandate, most families should expect to pay higher premiums for plans in 2019 than they did in prior years. However, the premium tax credit has also increased for 2019, helping qualifying taxpayers to subsidize their costs for coverage. High-income families that do not qualify for the premium subsidy may want to consider setting aside pre-tax dollars into health savings accounts (HSAs) to help them pay healthcare costs, including marketplace plan premiums.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The Internal Revenue Code allows a deduction for 50 percent of the cost of a meal at which business is discussed. The language contained in the 2017 Tax and Cuts and Jobs Act reforming the U.S. tax code appeared to imply that businesses could no longer deduct expenses for client meals enjoyed at entertainment events, such as sporting events, concerts, theatrical performances, golf and fishing outings, and cruises. According to the IRS, however, businesses can continue to take advantage of this valuable tax break in 2018, even when they cannot write off the costs of the entertainment activities.
In its most recently issued guidance, the IRS said that companies can continue to deduct 50 percent of the costs they incur for meals with clients at entertainment events, as long as those meals are not lavish, and they are considered ordinary and necessary for the active conduct of the taxpayer’s trade or business. The only other criteria businesses must meet to qualify for the 50 percent meal deduction is to have a receipt demonstrating that they paid for the meal separately from all other entertainment-related expenses, which, in and of themselves, are no longer deductible under the new law.
For example, if a businesswoman treats a client to tickets to a baseball game where she also buys the client a hot dog and drinks, she may not deduct the entertainment expenses of the tickets. However, she can deduct 50 percent of the costs for the food and drinks purchased separately. Yet, if a businessman invites a prospective client to join him at a suite at a basketball game where food and drinks are provided, both the tickets and the food are considered entertainment expenses that are not deductible under the law. The only way the taxpayer can deduct half of the food and beverage expenses is if he has an invoice separating out those costs from the non-deductible entertainment costs of tickets.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Despite the generous tax breaks that the Tax Cuts and Jobs Act (TCJA) delivers to most businesses, the new law also introduces a few unfavorable provisions, including a significant limit on the deductions that certain businesses can claim as business interest expense.
Changes to Regulations
Prior to the TCJA, most businesses generally could deduct 100 percent of the interest accrued and paid on loans, credit cards and other types of business-related debt instruments they entered into to finance their operations. The primary restrictions to the deduction applied to loan interest associated with a taxpayer’s passive activities and those items of interest U.S. corporations paid to their foreign affiliates that did not have exposure to U.S. federal income taxes or were located in countries with a lower tax rate than the U.S. To prevent U.S. businesses from abusing the deduction to strip earnings out of the U.S. to lower tax jurisdictions, the tax code disallowed the deduction when an entity’s net interest expense exceeded 50 percent of its adjusted taxable income, and when the borrower’s debt equaled more than one-and-a-half times its equity.
This changes in 2018 with the passage of the TCJA, which eliminates the full deduction of business interest expense for those entities whose average annual gross receipts from all related businesses exceeds $25 million during the three years prior to the year in which the taxpayer is claiming the deduction. Rather than completely repealing the deduction, however, Congress limits the amount that large businesses may write off for business interest expense to the sum of:
- Business interest income,
- 30 percent of adjusted taxable income (ATI) before interest taxes, depreciation and amortization (EBITDA) for tax years 2018 through 2020, and
- Floor-plan financing interest on debt that taxpayers extend to customers to finance the purchase or lease of motor vehicles, boats or self-propelled farm machinery or equipment.
In 2022, the deduction will be limited further to 30 percent of ATI before interest taxes (EBIT) depreciation. Any remaining business interest expense disallowed as a deduction under the new 30 percent ATI limit may be carried forward indefinitely and applied to future tax years unless the limitation amount is more than taxpayer’s net business interest expense for the year.
Who is Not Subject to the 30 Percent Limitation Rules?
The TCJA specifically exempts from the 30 percent deduction limitation those businesses whose aggregate gross receipts for the three most recent tax years are $25 million or less. According to the IRS, this exemption will exclude most all small and midsize U.S. businesses from the limitation rules.
It is important for taxpayers with affiliated corporations that file consolidated returns to recognize that they must apply the gross receipts test at the single-entity group level for all of their related companies. However, taxpayers may exclude intercompany debt from this gross receipts calculation. Taxpayers also should note that their calculation of average annual gross receipts will vary from year to year based on how their businesses performed over the most recent three years. For example, a business filing taxes for 2018 will be subject to the business interest expense deduction limitation when average gross receipts totaled $30 million for 2015, 2016 and 2017. However, if the company has a bad year in 2018 and average gross receipts for 2016, 2017 and 2018 total $20 million, it will be exempt from the limitation rules and be able to deduct the full amount of business interest expense on its 2019 tax returns.
The law also provides a special exemption for certain real estate and farming businesses. Specifically, businesses that develop/redevelop, construct/reconstruct, acquire, operate, manage, rent/lease or broker real property may elect out of the business interest expense limitation. However, doing so will require them to use the Alternative Depreciation System (ADS) to more slowly depreciate nonresidential property, residential rental property and qualified improvement property. Making this decision requires taxpayers to plan ahead and rely on their accountants to determine whether electing out of the rules and applying lower depreciation deductions would provide them with enough of a tax benefit.
Considerations for Electing Out of Business Interest Estate Rules
Real estate businesses that make an election to opt out of the interest expense deduction limit rules must recognize that doing so is a permanent decision they cannot revoke. Therefore, special consideration should be given to not only the potential advantages of making an election to be exempt from the new rules and claiming a full deduction for business interest expense, but also the reduced annual depreciation deductions and loss of first-year bonus depreciation that comes with electing out.
Making these decision is even more complicated today, while we await further guidance from the IRS on how businesses, including partnerships and pass-through entities, should interpret the law and apply it to their specific and unique circumstances.
The advisors and accountants with Berkowitz Pollack Brant work with businesses in all industries and across international borders to help them understand complex and evolving tax laws and develop sound strategies for complying with the law while maximizing tax-saving opportunities.
About the Author: Andreea Cioara Schinas, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Certain taxpayers affected by Hurricane Florence have until Jan. 31, 2019, to meet all of their tax filing and payment obligations that had original deadlines of Sept. 7, 2018, or later.
This postponed deadline applies automatically to taxpayers located in the designated disaster areas:
- North Carolina counties: Allegany, Anson, Ashe, Beaufort, Bladen, Brunswick, Cabarrus, Carteret, Chatham, Columbus, Craven, Cumberland, Dare, Duplin, Granville, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Montgomery, Moore, New Hanover, Onslow, Orange, Pamlico, Pender, Person, Pitt, Randolph, Richmond, Robeson, Sampson, Scotland, Stanly, Union, Wayne, Wilson, and Yancey.
- South Carolina counties: Berkeley, Charleston, Chesterfield, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Marion, Marlboro, Orangeburg, Sumter, and Williamsburg.
- Virginia counties: Henry, King and Queen, Lancaster, Nelson, Patrick, Pittsylvania, and Russell counties and the independent cities of Newport News, Richmond, and Williamsburg.
Tax obligations that qualify for this relief include payments of 2018 third-quarter estimated income taxes (traditionally due on Sept. 17) and filings of quarterly payroll and excise tax returns (traditionally due on Oct. 31). In addition, business and individual taxpayers who have valid extensions to file their 2017 federal tax returns by the respective September 17 and October 15 deadlines now have until the end of January to meet those filing responsibilities without incurring a penalty.
It is important for businesses to recognize that penalties on payroll and excise tax deposits due on Sept. 7, 2018, and before Sept. 24, 2018, will be abated as long as they make the deposits by Sept. 24, 2018.
Taxpayers who live outside the designated disaster areas and are unable to meet their upcoming filing obligations may request a deadline extension when their records are located in the disaster areas or when they are working with a recognized government agency or philanthropic organization that is assisting with relief efforts. In addition, taxpayers should note that as storm recovery continues, other counties may be further designated as disaster areas eligible for the deadline extension.
Not only does this deadline extension alleviate the pressure for storm victims to timely complete and file their returns, it also provides taxpayers located in President-declared disaster areas to claim a casualty loss on their 2017 tax returns (rather than 2018), if they desire to do so.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
